Generally speaking, whole life insurance policies are life insurance policies that remain in force for the insured customer's whole life, provided that the owner of the policy pays the required premiums.
Some types of whole life policies are referred to as “participating” whole life policies. Generally, in a participating whole life policy, the insurance company shares a portion of profits for a particular block of policies with the owner of each policy in that block. Thus, each policyholder “participates” in the performance of their block.
Some participating whole life insurance policies contain guaranteed values that are based on long-term assumptions for factors for each block of policies. For example, factors such as expected investment returns, mortality rates, operating expenses, lapse rates, and tax rates may be used to estimate guaranteed values. If the actual performance for the block of policies is more favorable than the guaranteed values, an operating income is generated (e.g. a “surplus”). Each year, the insurance provider may distribute a portion of the surplus as a “dividend” paid to the policyholders. The remainder of the surplus may be held in the reserve fund to maintain the strength and stability of that block of policies into the future.
In addition, policyholders of participating whole life insurance policies have rights akin to ownership in the insurance company. For example, participating policyholders may have certain voting rights, such as a right to choose a predetermined number of board members.